What Will Economic Policy Look Like Under Trump? A Conversation with Austan Goolsbee

While there is obviously a great deal of speculation regarding specifics, the general contours of President-elect Trump’s economic plan seem to include large tax cuts, particularly for wealthy individuals and corporations, aggressive deregulation of the financial and fossil fuel industries, a more protectionist stance on trade issues, and perhaps some incentives for infrastructure projects, possibly in the form of tax credits. Taken together, what effect will the Trump agenda have on growth and Americans’ wellbeing over the short- and long-term?

That sounds like an accurate description of where they’ve been going. Through the campaign, there was a contest of views within the Trump camp between the supply side advisers—including Stephen Moore and Larry Kudlow—who advocate for large tax cuts but are also pro-trade, and the other side—Peter Navarro and Wilbur Ross—who are much more nationalistic and argue for making trade and manufacturing the center of the economic agenda.

We’ll have to see how those divisions play out, though it seems that big tax cuts are one of the only things on which all Republicans agree. As a research economist, the evidence indicates that massive tax cuts—especially when steered towards the very high end—are not great for overall economic growth, particularly on a bang for the buck basis, and will just substantially swell the deficit.

It feels like to me that it’s going to be a 2x version of George Bush in 2001. And in the classic pattern of American politics, Republicans will massively overstep their mandate. Trump won with one narrowest victories in recent history. But because they control Congress, Republicans will have a very expansive agenda of deregulation and tax-cutting, which eventually will—if the past is a guide—cause the pendulum to swing back the other way and lead people to say, “ah, look at all the things that went wrong with that approach.”

People are talking about Trump as somewhat outside the traditional Republican mould since he shares a few priorities, at least nominally, with President Obama and other senior Democrats. Infrastructure has been perhaps the most salient. From what we know of his plan so far, in what ways does his approach on infrastructure differ from the one espoused by the outgoing administration?

The first issue is whether Trump is actually different from other Republicans because he likes infrastructure. In practice, I think he’s going to look very much like traditional Republicans because that is who supports him in Congress. He’s going to go to them and say, “What are some of your ideas and what can we do together?”

On infrastructure, we’ll have to see how it plays out. His plans are pro-tax credits for private sector infrastructure—which it is worth noting, is hardly any of the infrastructure in the country. To me, that sounds much more like real estate development incentives, a national version of the sort of state and local incentives that he himself took advantage of while running his company. If that’s the case, I think we might get a few more sports stadiums built, maybe some toll roads—though I doubt it since those have a long run-up process and requirements such as environmental impact studies. That plan invites what economists call infra-marginal projects, ones that were already teed up and were going to get done anyway. Investors will simply make more money on them.

The irony of this plan is that you are now seeing the Trump camp leaning towards using a one-time tax on unrepatriated foreign earnings for infrastructure. That was Obama’s idea! The Republicans were against that idea; they didn’t want to use the money on that. If that’s where your money comes from, it puts a limit on how big your infrastructure agenda will be. It sounds like they’re trying to get out of that limit by using the money for tax credits rather than using it directly on infrastructure. But unless, and until, they can get the private sector building traditional economic infrastructure, I fear this will just invite developers to reclassify whatever they were already doing to secure credits.

The Trump administration is reportedly considering total withdrawal from NAFTA and has threatened to impose a 45 percent tariff on Chinese imports. Some experts contend that such drastic action is unlikely given the economic consequences and congressional recalcitrance. What actions could the Trump administration conceivably pursue to deliver on his campaign promises regarding trade?

Let’s hope he doesn’t deliver on those campaign promises because I think the consensus is right: starting trade wars with our three largest trade partners simultaneously will not bode well for the U.S. economy. He has already partially carried out what he promised by blowing up the Trans-Pacific Partnership (TPP). I bet they label China a currency manipulator, even if they put off deciding what they will actually do about it. Mexican President Enrique Peña Nieto says that he’s open to negotiating a modernization of NAFTA. Interestingly, the TPP, because it includes the U.S., Canada and Mexico, was already going to be a modernization of NAFTA, since whatever rules they pass there were going to supersede NAFTA’s.

If Trump is not ideologically committed to the trade war tactics, it seems like the proposal of the Mexican president would give him a face-saving way forward that allows him to say, “see, I cancelled TPP, I labeled China a currency manipulator, and I renegotiated NAFTA all in my first three months in office like I promised.” I hope that’s what he does. But like I said, there’s a contest of ideas going on in the Trump camp. He could do something far more destructive if he really pushed forward with 45 percent tariffs and blew up NAFTA, unless Mexico gives us giant concessions (which they can’t). Even though trade isn’t that big a share of the US economy, that would send us into recession for sure.

A theme of this campaign, on both sides, was mitigating the effects of trade on U.S. employment in areas such as manufacturing. In your view, what is the appropriate policy response to voter anxieties regarding globalization?

In the medium and long run, it has to be investing in the skill base of your own people—education, vocational and career training. That’s the only thing that has worked. The countries that have benefitted most from globalization are the places that made that kind of investment. The U.S. starts from a position of strength in this regard, not a place of weakness.

If we’re insisting that we’re going to try to keep the world out—keep out their stuff, keep out their people, keep out their ideas—and keep ourselves rich, well that’s a policy that has been tried hundreds of times all around the world. And it doesn’t make you rich, it makes you poor. And we’ll find that out if we do that, just like all of those other countries did.

Is there something you can do in the near-term?

In the short-term, the question would need to be more specific. Anything that you do that drives up the value of the dollar has a disadvantageous impact on manufacturing and makes exporting harder. As occurred in the 2000s when the dollar appreciated a lot, the economy can still grow with a strong dollar, it will just be in sectors other than the blue collar manufacturing sectors.

So, in the short-run, if he wants to help those sectors, Trump will need to think seriously about who he is going to put on the Board of the Federal Reserve. Does he really want to be yelling at Janet Yellen, telling her that she’s been keeping rates too low for too long? Because as rates go up in the U.S. while no one else is raising rates, the dollar is going to appreciate more.

That actually leads into my next question concerning monetary policy. As you noted, Trump sent pretty contradictory messages during the campaign—he criticized Federal Reserve Chair Janet Yellen for ostensibly delaying interest rate hikes for political reasons, yet has labeled himself a “low-interest rate person.” What factors do you think the President-elect and Republican lawmakers will be weighing as they begin nominating and confirming Fed officials?

That’s a good question, and a tough question, because as you point out, Trump’s shtick is not a policy shtick. He’s been very critical of the Fed, but from multiple sides that are contradictory. He has the chance to reshape the Fed pretty quickly since they have these two governor spots that have just been vacated.

If they’re sophisticated about it, they would merge their Fed choices with their ideas about financial regulation. There is no official vice chair of bank supervision, and they can name that person. The Fed is in charge of a lot of oversight of the financial system. So whatever they want to do on financial regulation and Dodd-Frank, a complementary approach to the legislative route is to put people in the Fed aligned with their vision.

My intuition is that, though he’s been critical about raising rates, once he’s in office Trump will quickly realize why the incumbents are almost always pushing for looser monetary policy. I bet he, in one year when Yellen comes up, he will put in a Greenspan-like figure who favors deregulation, more lending, and lower rates.

While Congress appears poised to strip key provisions of the Affordable Care Act (ACA), Trump has indicated support for retaining certain benefits, such as the ban on denying coverage due to pre-existing conditions. What would the effects be for the insurance industry and for individuals of such a move?

Vice President-elect Pence has already said that they’re going to make outright repeal of Obamacare one of their top priorities. They have a decent chance of doing that. If they fail, I predict they follow up with a bill that abolishes all the subsidies on the exchanges. It doesn’t make policy sense, but they will use a logic of “why should the government subsidize those people’s insurance and not yours?” (I would respond that your employer subsidizes your insurance).

That will save money in a budget sense, which they may use to partially fund the tax cut. But many fewer people will sign up for insurance, only the costly ones will remain, and the prices will go up. That will be the death knell of the exchanges. In a devious way, the Republicans will say, “we didn’t take away your Obamacare, it failed on its own. You shouldn’t be mad at us; you should be mad at Obama because it was his program that failed.”

The ideas that they have for replacing are a dog’s breakfast of traditional Republican ideas on healthcare: expand healthcare savings accounts, put a little money in these high-risk pool funds, allow buying insurance across state lines. That last one doesn’t really make sense to me. If you’re in Ohio, what does it mean to “get” your health insurance from Arizona? Do they have a network in Ohio? And even if they do, different states have different mandates. Some states require insurance to cover vaccines, others don’t. I just don’t fully understand how that works.

So, in short, I think if you come back in four or five years, the number of people without coverage will be much higher. We’re going to be back in a world like the one that existed before the ACA.

The Democratic primaries revealed real differences on issues such as the TPP and healthcare, divisions that are likely to resurface as the party rebuilds itself. As someone who crafted policy under a Democratic administration, what kind of economic agenda do you hope the party adopts going forward?

You know it’s funny, in less than a week people went from, “The Republican party is about to blow itself up,” to “the Democrats have no bench and they can’t agree on anything.”

I continue to think that the most important thing facing the economy is growing in a way that everyone can share and investing in our own people. Hopefully the Democrats come around to that. It’s not a surprise that as an economist, I’m not a big fan of the idea, in either party, that our problem is that we buy too much from the rest of the world. I think that’s nonsense, and I think most people recognize that it’s nonsense.

The Democrats are going to have to go through some soul-searching. It’s going to be a tough period because a lot of the major accomplishments of the last eight years are either going to be torn up or severely curtailed.

Your question was what I hope the policies are. I would say reinvesting in our skill base and expanding science, innovation, and entrepreneurship to get the growth rate up.

I think there are some things Democrats want that overlap with what Republicans want. But it strikes me that the situation in D.C. now is not open to that brand of compromise. Politics has turned into sports, where it’s all just a zero-sum game.

What are the areas of overlap with Republicans that you see?

Education, investment in training, some of the science, R&D, and encouraging entrepreneurship—in any of those spaces there will be several things where people could come together.

But for now, the focus now will be on the regulatory side. If there ever was proof that it doesn’t make you anti-market to be for stronger rules of the road, and that just ripping up all the regulations doesn’t help, it was the crisis of 2008. That approach isn’t even pro-business, if you look at it in the medium-run. Clearly Republicans didn’t learn that lesson, and they are basically advocating for a return to a world where we are not going to be able to trust the data that comes out and where people don’t have to disclose things. We put ourselves at risk by doing that.

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